Eye on the Economy: Low Inventories Driving Permit Growth

While recent economic reports suggest that home building took a pause at the beginning of 2013, leading indicators point to more growth for housing in the months ahead.

Per data from the Census Bureau, housing starts were down 8.5 percent in January. However, all of the loss was in the multifamily segment, where construction fell from an unusually high annualized rate of 365,000 in December to a steadier 277,000 rate in January. On a year-over-year basis, starts of multifamily units in properties with five or more units remain up 35 percent. Single-family starts were virtually unchanged in January at a 613,000 rate, up 0.8 percent from December.

Narrowing in on the custom home building market, roughly defined as owner-built or owner-hired, contractor-built homes, quarterly Census data indicate a declining market share as other forms of home building pick up. As of the end of 2012, custom home building fell to a quarterly total of 30,000 starts, placing the one-year moving average of market share of total single-family starts at 24 percent. This is down from the cycle high of 31.5 percent set during 2009, although the share remains elevated compared to historical conditions.

The NAHB Housing Market Index (HMI) continued its pause in February with an index value of 46, down one point from the December and January level of 47. Builders remain just shy of the 50 mark, at which a majority of builders are optimistic versus those that are not. Nevertheless, the index rose consistently from April to December 2012 as builders saw more serious buyers in their models and offices.

Consistent with this long-run improvement of building conditions, housing permits continued their steady increase to a high not seen since mid-2008. The Census Bureau reported total permit activity was up 1.8 percent and the rise was evenly spread across single-family, up 1.9 percent and multifamily, up 1.5 percent.

New home sales increased significantly in January, with the months’-supply measure of inventory dipping to the lowest value in eight years as housing demand continues to return. The Census Bureau reports that on an annual, seasonally-adjusted basis, new homes sold at a 437,000 pace in January, up 15.6 percent from December and 28.9 percent from a year ago. The improvement was broad based in all four Census regions. The surge in sales and already low inventories reduced the months’ supply to 4.1, the lowest since March 2005.

Existing home inventory is down as well. Per the National Association of REALTORS® (NAR), existing home sales increased 0.4 percent in January from a downwardly revised level in December, and were up 9.1 percent from the same period a year ago. Total housing inventory at the end of January decreased 4.9 percent from the previous month to 1.74 million existing homes for sale. At the current sales rate, the January 2013 inventory represents a 4.2-month supply compared to a 4.5-month supply in December, and a 6.2-month supply of homes a year ago. The January housing supply is the lowest since the 4.2-month supply reported in April 2005.

And the NAR Pending Home Sales Index (PHSI) foreshadows more growth. A forward-looking indicator based on signed contracts of existing home sales, the PHSI increased 4.5 percent in January 2013 to 105.9, up sharply from the downwardly revised 101.3 in December. The January 2013 PHSI was 9.5 percent higher than the same period a year ago and is the highest since April 2010 when the home buyer tax credit was expiring. Prior to the tax credit, the last time the PHSI was this high was the 107.9 level reached in February 2007.

Home sales are certainly receiving a boost from continued improved housing affordability conditions. Low interest rates helped produce a slight gain in nationwide housing affordability amid relatively stable house prices in the final quarter of 2012. The NAHB Housing Opportunity Index (HOI) rose to 74.9 percent, up from 74.1 percent in the third quarter. The HOI is the share of new and existing homes sold in a quarter affordable to a family earning the median income. An HOI of 74.9 means that 74.9 percent of all homes sold in the last three months of 2012 were affordable to families earning the national median income ($65,000).

Low inventories and improved housing demand conditions inevitably mean home prices are rising. The monthly Federal Housing Finance Agency national price indexes were 1.4 percent for the last quarter of 2012 and 5.9 percent for the year. The quarterly Case-Shiller national indexes were up 2 percent for the quarter and 7.3 percent for 2012.

Rising prices are also likely connected to improved foreclosure statistics. For example, recent data from the Mortgage Bankers Association National Delinquency Survey indicated that the foreclosure starts rate fell to 0.7 percent at the end of 2012, the lowest reading since the first half of 2007 and the largest quarterly decline ever recorded in the survey. However, rising home prices may affect the housing affordability and the level of investor and cash-buyer housing demand in the months to come.

Home prices are not the only costs going up. Recent Producer Price Index data from the Bureau of Labor Statistics show the prices for certain building materials have risen sharply. Gypsum prices rose 12 percent in January from December, mirroring a steep increase at the beginning of 2012, and are now 27 percent above year-ago levels. The pattern of price increases for wood products has more closely reflected improvements in the housing market. Producers of gypsum and OSB have blamed the recent price increases on reduced productive capacity (mothballed plants and equipment) following the long drought in housing.

Amid these market updates, NAHB recently took a deeper dive on a few analytical topics. New research examines the role that the wave of recent refinancing activity has had on household mortgage debt burdens. In fact, refinancings now account for 72.5 percent of all mortgage applications. Since 2010, the share of such refinanced mortgages that yield a lower loan amount has exceeded those that produce at least a 5 percent larger amount. Combined with lower interest rates, these actions have been part of the deleveraging process that has helped heal household balance sheets.

In another review, NAHB economists examined bond market growth and the role of asset-backed securities, finding that between 1980 and 2007, mortgage-related and asset-backed securities accounted for the majority of growth in the U.S. bond market.

Finally, NAHB recently published the Remodelers’ Cost of Doing Business Study, a nationwide survey of residential remodelers detailing information regarding income statements and balance sheets for 2011. Among the findings of the report, the average residential remodeling company collected about $1.1 million in total revenue and reported a 3 percent net profit margin.

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